February 8th, 2006

Net Neutrality


In Jan this year, a frontpage article on WSJ quoted Verizon Chief Executive Ivan Seidenberg “We have to make sure they (Google) don’t sit on our network and chew up our capacity”. Both AT&T and Bellsouth also made similar statements in the same article. A few days ago, Verizon repeat their call to “End Google’s Free Lunch”: “A Verizon Communications Inc. executive yesterday accused Google Inc. of freeloading for gaining access to people’s homes using a network of lines and cables the phone company spent billions of dollars to build.”

Also related, Verizon filed with FCC that they have plans to set aside bandwidth on their fiber optical network, effectively creating a two-tier Internet, one big-fat pipe for Verizon and their partners services and another for the rest. This is one of the consequences many already foresee when FCC removed the many obligations from broadband providers in order to spur the growth of broadband and fiber network in 2003.

Thus, it is no surprise that Network Neutrality, a concept where broadband providers are not to discriminate rivals when they charge tolls or prioritize traffic, is now on the agenda of the US Congress.

This reminded me of an article I wrote two years ago on how telecom business model is transforming from a vertically integrated business to a horizontal layered model: “To keep themselves relevant and “sexy” to their investors, they will move up the chain. They will provide not only their infrastructure services but also Internet access and even new service and content. And don’t expect them to give right-of-way to other Internet Access Providers, or Service and Content Providers given a choice.”

In traditional telecom model, we have local loop unbundling (LLU) to create a competitive and liberalized market. But the business model has changed. Instead of one network for one service, we now have one network and multiple service providers above it. The problem occurs when the network provider also wants to be service provider and refused to play nice with rivals. Sadly, we have no equivalence of LLU in this new paradigm yet.

Strangely, the lack of the regulation is actually due to us, the Internet proponents. For many years, we argued strongly that Internet should not be subjected to government regulations but rely on interoperability, market forces and Metcalfe’s Law to resolve itself. That message has been very successful and many regulators have adopted a doctrine that they regulate the physical network (spectrum, fiber, etc) but Internet and the applications of above it are to remain unregulated.

Yet, that doctrine missed an important point: That business model has changed, that the physical network isn’t as important anymore and that Internet is the network. When you have a powerful player (or a group of players) who does not play nice with its rivals, there is a market failure.

The unregulated crowd would argue that if Verizon customers couldn’t access Google, then their customers will switch to another service provider. Ergo, market will correct itself. Lets assume everyone has that choice to switch service providers (many don’t) and it’s difficult for Verizon to turn off Google/Vonage/MSN without losing large number of customers, if “market force” and “unregulated” is the policy, then there is nothing stopping Verizon to turn off one of the smaller VoIP or IPTV rivals.

Back to the debate on Network Neutrality, the two side of the debate can be summarized as below.

The Bells: “Verizon is spending billions of dollars to construct a fiber-optic network around the country for delivering high-speed Internet and cable TV services. Executives at other telecom companies, such as AT&T Inc. chief executive Edward E. Whitacre Jr., have suggested that Google, Yahoo Inc. and other such Internet services should have to pay fees for preferred access to consumers over such lines.”

The Anti-Bell (Om Malik): “I don’t know if you charge people about $75 a month, or about $825 a year for DSL and phone service, it is your job to fix the line. Did Google come and take my money as monthly service fee?”

Both actually agreed on one subtle point: Someone has to pay for the infrastructure. It is important to point this out because it is easy for the Verizon to accuse Google for having a “free ride”. The real question is “Who pays?” To use an analogy from the telecom model: caller-party pay, receiver-party pay or both-party pay. Verizon wants both-party pay.

It is conceivable that this is one of the most important debate as it will change the settlement system on the Internet. In a both party-pay system, we will have a tariff, where Verizon will charge Google for accessing Verizon’s network but Google could also charge Verizon for allowing Verizon customers to use its services. This would have cascading effect in all other interdependent services on the Internet (even outside US). Interesting enough, this could be used as a justification for ICANN to impose a “tariff” on the ISPs for the use of root servers, something that the ISPs has refused to do so for many years.

Anyway, now that Network Neutrality is a debate in US Congress, the lobbyists must be hard at work. While FCC has adopted principles similar to Network Neutrality and that FCC has come down swift against those block their rivals’ service, given the ever changing politics within US, it is difficult to predict how debate will go.

Sadly, philosophical debates like “Network Neutrality” don’t win votes. The decision will ultimately focus on the business or benefits it will bring to their congressional districts. Hopefully one of them would ask if it is in the interest of United State if Google and the likes-of-Google have to pay Verizon and all the likes-of-Verizon in the world.

The world is watching.

Update: US Congress hearing

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